How microcredit works

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Micro-credit works wonders – where it exists

Special loans for non-traditional borrowers have yet to reach their potential in Lebanon

By Osama Habib, Daily Star staff

BEIRUT: The Nobel Peace Prize awarded to Bangladeshi banker Muhammed Yunus for his efforts to create economic and social development through micro-credit loans is an important landmark in the long history of the Nobel program. The reason is simple: This is the first time attention has been given to an individual who tried very hard to relieve the financial suffering of the poor.

In Lebanon, where the number of those living in poverty has been growing steadily, the expansion of micro-credit has the potential to be one of the ways to reduce the pain of large segments of the population and contribute to the growth of the country's gross domestic product. But experts note that micro-credit programs are still not as widespread in Lebanon as they are in many countries in Asia and Africa.

Micro-credit, which usually provides soft and small loans to people who do not qualify to receive orthodox loans from traditional banks, has been applied by several non-governmental organizations (NGOs) and a handful of banks in Lebanon. Audi Saradar Bank has worked with NGOs to provide micro-credit. Jammal Trust Bank is one of the few banks in the country which is very involved in micro-credit, especially in the South, the Bekaa Valley and other poor, primarily rural areas.

Micro-credit usually focuses on individuals who are not "bankable" under the definitions followed by most traditional banks. Traditional banks frequently require clients to provide collateral or some other kind of guarantees in order to get a loan.

But in the case of a micro-credit program, the majority of the applicants are people who have very low incomes or no steady jobs with established companies.

The Cooperative Housing Foundation International (CHF) has made a serious attempt to address the issue of micro-credit in Lebanon.

"Micro-finance in Lebanon matters for three reasons," CHF said in a report on the subject.

"First, economists, government, and donors believe that constraints on access for low-income households might affect how well Lebanon can achieve rapid economic growth and share the fruits of growth. Second, access to micro-finance can help improvements for the poor families. Third, access is important for equity."

It added that increasing families' income is a first step toward building some wealth, which is obviously a key requirement to escape poverty. "But access to finance requires wealth in the first place."

The group stressed that access to standard bank credit requires assets that most of the poor do

not have, such as buildings or land. In contrast, micro-finance uses assets the poor do have, such as reputations or household goods.

It also noted that the micro-finance sector in Lebanon has witnessed very limited growth over the years. "The sector seems to be dominated by a very few major organizations," the report found, "limiting a healthy competition that could give the providers an incentive to improve efficiency, lower operational costs, decrease interest rates charged to the final borrowers and improve product innovation."

The CHF has not been pleased with the pace at which Micro-credit has spread in Lebanon.

"The lack of government support and micro-finance initiatives exacerbates the problem of discouraging the entry of new micro-finance organizations and improving the micro-finance sector offerings," the CHF's study warned.

Despite serious efforts carried out by various actors over the past 10 years to expand programs, micro-credit is not as popular as in other emerging countries such as India, Pakistan and Bangladesh.

Micro-credit represents such a tiny percentage of total outstanding loans provided by traditional Lebanese banks to the private sector or individuals that in many cases these institutions do not even include it on their balance sheets.

Youssif Khalil, the head of the Financial Operations Department at the Banque du Liban, said that relatively speaking, Lebanon's achievements in the area of micro-credit programs are still acceptable compared to other Arab countries.

"But yes we are not as developed as Latin America or the Asian continent in general," Khalil told The Daily Star in an interview.

He argued that banks in general cannot entertain the idea of maintaining micro-credit programs because it is too costly.

"It is easier for a bank to deal with one or a few customers involving loans of $5 million, for example, because it will require one or two staff at the most. But in the case of micro-credit, the banks will have to hire many loan officers to follow the cases of thousands of small loan recipients," Khalil stressed.

He added that a micro-credit officer is frequently called upon to go out into the field in order to interview some of the potential recipients.

"That's why some of the banks have preferred to empower some of the NGOs to implement micro-credit programs," he explained.

Khalil, who is widely considered one of Lebanon's strongest advocates of micro-credit programs, has worked closely with several NGOs to promote the increasingly well-known practice.

He added that some commercial banks have become more involved in private and commercial loans over the past five years and are also getting more involved in small products.